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By Marlin Cobb
Last week Danny asked if I would guest-write the Opening Print, which for me was quite the honor. Even more exciting is to be asked back again! So here we are now a week later. Last week I shared some market breadth information as a trading tool for helping to develop a bias for the markets. Let’s do a quick review and then look into the war-torn, looming cliff, riots in the streets of Europe future.

From last week we talked about the Zweig index (the 10-day moving average of the Advance/Decline line) and the need to get into the oversold area in order to base a bottom for another run to market highs.

With that mission accomplished, now what?

Now the battle for the bottom has begun. The bears have pushed the S&P 500 down nearly 10%, we are in extreme oversold conditions on breadth indicators, so we wait out the battle, which could be two to four weeks long.

We think there is a bounce here. Selling should exhaust and a combination of short covering and bargain buying should get our breadth indicator back to more normal levels. That is not guaranteed, and like all return-to-mean strategies, the ball can be played out of bounds for a while.
Here is our 40 DPI chart (the percentage of stocks above their 40-day moving average).

This is another bounce area extreme, so we are looking for some upside here ... now the word of  caution. Bottom battles are very volatile. Ten points can be added or subtracted in the blink of an eye. It is adult swim time and if all that splashing and horseplay scares you ... stay out of the pool. Once the bottom is in place and a reversal to the upside is established, the trading will become easier and clearer.

I give three observations for trading violent markets.
1. Don’t
2. Reduce your size and widen your stops. You could need 10- or 20-point stops here to make your targets. It is difficult stuff.
3. Reduce your time frame. If you swing, then scalp; if you scalp, then micro-scalp. Put your charts in a timeframe that has a volatility and range that you are comfortable trading in, one where your indicators look normal.

Breadth is screaming for a bounce, all news aside, this market is primed for a couple of days up. If we could just stop the rockets, scale the cliff and get the Greeks back to work.
Have a great weekend all:

Marlin Cobb
Aka RedlionTrader
Follow me on Twitter @redliontrader

Chart by Forexlive

The S&P has been going any which way but up. If it’s not the fiscal cliff it's the European Union, if it's not the EU it’s China. Since President Obama's re-election the S&P is down 83 handles and on its way to 100. As we head into the final 6 weeks of 2012 we wonder when the PPT is going to come to the rescue.

The S&P sold off again late in the day but bounced, leaving the S&P down only -0.16%. Yesterday's selloff was backed by a batch of negative economic reports and the continued worry over the fiscal cliff. With the S&P off nearly 6% since last week’s presidential election, the S&P is on its way to its largest monthly loss since May. The SPZ has been down 5 out of the last 7 trading days. Of the 2 days the SPZ did close up, the total gain was only +2.9 handles. On the negative side of the trading card is an 89-handle drop from 1432 down to the 1344s.

Let’s face it. What's going on right now is out of control. With Congress letting out on Dec. 17 until Jan. 2 for the holidays, we only have 32 calendar days for the government to figure out a deal. We already know Obama is going to sock people making $250k a year, but there is a lot more at stake than just that -- we’re talking a S&P or Moody's downgrade. It happened before and it's going to happen again. What are our government officials thinking? What are they going to do? And when are they going to do it?

The Pit Bull pointed something out late in the day. He said that it was very unusual to have a TRIN reading of 64 with the S&P going down. While there was a nice little bounce off the lows of the day, the overall price action was pretty much what it was all week -- negative. All the rallies failed and we also got the afternoon drop like we have been getting for the past week.

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Wednesday Nov 7 SPZ -36.1
Thursday Nov 8 SPZ -13.8
Friday  Nov 9 SPZ +.40

Monday  Nov 12 SPZ +2.5
Tuesday  Nov 13 SPZ -7.30
Wednesday Nov 14 SPZ -17.9
Thursday Nov 15 SPZ -1.6

Our view:
Let’s face it: There is no clear way out of what's going on. Economic turmoil in the U.S. and Europe and a war in the Middle East. Today is the November expiration. According to the Ned Davis S&P cash study, the S&P has been up 15 / down 13 of the last 28 occasions. The bottom line is the markets are still in trouble and until the government steps up to the plate and starts making some progress on the fiscal cliff the markets are going to continue lower. The markets hate uncertainty and that’s exactly what we have. What we’ve learned is every bounce is being sold, and we don't expect that to change today. As always, keep an eye on the 10-handle rule and please use stops.

Today’s data:

  • It’s 6:00 a.m. and the ESZ is down 3.25 handles at 1348, crude is down 23 cents at 85.64 and the EC is trading 1.2739, down 38 ticks.
  • In Asia 8 of 11 markets closed lower (Shanghai Comp. -0.77%, Hang Seng +0.24%)
  • In Europe 11 out of 12 markets are trading lower  (CAC _0.06%, DAX -0.19%).
  • Today’s headline: “U.S. Stocks Seen Lower Ahead of Fiscal Cliff Talks”
  • Economic calendar: Treasury international capital, industrial production, e-commerce retail sales; earnings from Foot Locker, JM Smucker, Ann Taylor
  • S&P futures volume: 2.4 mil ESZ and 11.6k SPZ traded
  • Fair value (7 a.m.): S&P +4, NASDAQ +6

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